`Bleak' Copper Seen Needing 17% Drop to Force Deeper Cuts

  • `Shell-shocked' producers may have no alternative but to cut
  • World's biggest producer Codelco says it won't reduce output

Copper could slide a further 17 percent by next year, plumbing fresh lows and forcing “shell-shocked” producers to make much deeper output cuts as consumption growth stalls in China, according to Ed Meir, an analyst at INTL FCStone Inc.

Demand in the world’s biggest user won’t expand next year, Meir said in an interview at an industry conference in Shanghai. “It’s grim-to-bleak, so the onus is on the supply side. The market needs to transition to a lower price point to force more cuts.”

A drop of 17 percent to $3,800 a metric ton would extend a 27 percent decline this year as investors fret over the weakest Chinese growth in a generation and a stronger dollar. Production cuts, most notably the 400,000-ton reduction by Glencore Plc in Africa, have failed to halt the rout.

“We dropped from $5,300 to $4,700 in six weeks, so people are probably still a bit shell-shocked,” Meir said on Wednesday. Producers “will get around to doing something about it. It takes time to cut or to decide to cut,” he said.

More Declines

Goldman Sachs Group Inc. says the bear cycle in copper has years to run, predicting rising global surpluses through 2019 and seeing prices at $4,500 by the end of 2016, with the risk skewed to the downside. Three-month copper fell to a new six-year low of $4,573.50 on the London Metal Exchange on Thursday.

Bearish economic data from China have increased bets on price declines and copper has scope to fall further if the numbers continue to weaken in the next three months, Fu Yubin, analyst at Goldman Sachs, said at the conference on Thursday. The outlook for demand from property is not optimistic and demand from grid investments is limited, while new energy initiatives will contribute only 0.6 percent a year to growth in usage in the next five years, Fu said.

Not everyone is bearish. Daniel Hynes, senior commodity strategist at Australia & New Zealand Banking Group Ltd., said the slump has been excessive. With supply cuts coming through, the metal may trade in the mid-$5,000s in 2016, Hynes said. Goldman’s Fu said in an interview the recent drop was overdone.

Vivienne Lloyd, an analyst at Macquarie Group Ltd., toldthe conference she sees potential for substantial output cuts at the $4,600 level and believes the current price to be unsustainably low.

Chile’s Codelco, the world’s biggest copper producer, isn’t considering output reductions and will focus on cutting costs to battle low prices, its chief executive officer Nelson Pizarro told the conference on Wednesday.

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